The Double-Edged Effect of R&D Expenditure and Compensation Policy

This study explores the potential double-edged effect of R and D expenditure and employee compensation policy. To examine the endogenous relationships among stock returns, R and D expenditure and employee compensation, we employ three-stage least squares method which is also able to evaluate firm's fundamental features, corporate governance and corporate signaling factors those endogenous variables may succumb to. The main feature of this study is that we do not attempt to find out firm's optimal mix of R and D expenditure and employee compensation; however, we use BCG model and divide the sample into several groups to measure the potential impact of different business types and support our endogenous analysis. So we can offer our suggestions to firms with issues regarding R and D expenditure and employee compensation under different business types. Finally, we utilize earning-smoothing index to examine if firms use research and development expenditure or employee compensation to smooth the earnings. If any, we find out their rationales. The empirical findings indicate that the driving factor, which affects stock returns, R and D expenditure and employee compensation, is the difference of business types. In addition, the endogenous relationships between R and D expenditure and stock returns are undetermined, but adopting different weighted R and D expenditures method according to different business types will aid the full disclosure of information. However, there exists a positive endogenous relationship between employee compensation and stock returns, which indicates that employee stock option plan is a practical incentive and deserves to retain. Finally, firm may employ R and D expenditure and employee compensation to manage firm's earnings, but, in practice, we could not rely on any single index to explore the potential influential factors. Key words:BCG Model; Three-stage Least Squares; Endogenous Relationship.